CAVINTI REALTY DEVELOPMENT CORPORATION, PETITIONER, VS. NERY CUSTODIO ABLAO AND MARIA CUSTODIO CUYA, RESPONDENTS.

Cavinti Realty versus Ablao

The Case

This is a petition for review on certiorari brought by Cavinti Realty Development Corporation against Nery Custodio Ablao and Maria Custodio Cuya, siblings who sued to recover a portion of a family landholding that they say was never sold. The action below is one for cancellation of Torrens titles and reconveyance, with partition and damages in the alternative. The case matters because it fixes, at the pleading stage, what a complaint for reconveyance must allege against a present titleholder who committed no fraud, and because it draws a sharp line between failure to state a cause of action and lack of cause of action, and between a real party in interest and an indispensable party.

Procedural History

Nery and Maria filed their complaint in 2014 before the Regional Trial Court of Santa Cruz, Laguna, against Cavinti Realty, Aerocom Investors and Managers, Dos Lagos Development Corporation, the Register of Deeds of Laguna, and the Municipal Assessor of Cavinti. Cavinti Realty moved to dismiss on three grounds: failure to state a cause of action, prescription, and its status as an innocent purchaser for value. The trial court denied the motion, ruling that the allegations sufficiently constituted a cause of action, that prescription was unavailing at that stage, and that Cavinti Realty was an indispensable party as registered owner. The trial court later corrected its order to specify the authorities relied upon, and denied reconsideration.

Cavinti Realty went up to the Court of Appeals by petition for certiorari under Rule 65, alleging grave abuse of discretion. The Court of Appeals denied the petition and affirmed the trial court, holding that the complaint stated a cause of action, that Cavinti Realty was an indispensable party, that prescription did not bar the action in view of the plaintiffs' alleged continued possession, and that the claim of good faith raised a factual issue unfit for resolution at the pleading stage. It also stressed that an order denying a motion to dismiss is interlocutory and generally not reviewable by certiorari absent grave abuse of discretion. Reconsideration was denied, and Cavinti Realty came to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Nery and Maria trace their claim to a 150,000 square meter parcel in Cavinti, Laguna, originally declared for tax purposes in the names of their grandparents, Spouses Zacarias Custodio and Josefa Toque, who acquired it in 1925. Their father, Pedro Custodio, and his mother Josefa, together with Pedro's children, inherited the property upon Zacarias' death. In 1969, after Zacarias and Pedro had passed away, the surviving heirs sold approximately 60,990 square meters of the property to Dos Lagos Development Corporation by deed of absolute sale. Nery and Maria maintain that the remaining portion of about 89,000 to 90,000 square meters was never sold and remained in the family's ownership and possession.

In 1980, Dos Lagos obtained Original Certificate of Title No. O-2159 covering a much larger area than what it had purchased, including lots far exceeding the 60,990 square meters sold. Nery and Maria allege that, through fraud or error, the title illegally included the unsold portion of about 90,000 square meters. Dos Lagos then subdivided and disposed of the property: the original certificate was cancelled, transfer certificates were issued for the subdivided lots, and Dos Lagos sold the lot encompassing most of the disputed unsold portion to Cavinti Realty, which obtained its own transfer certificate of title. Another portion was sold to Aerocom.

Nery and Maria aver that they and their predecessors have been in open, continuous, exclusive, and adverse possession in the concept of owners since 1926, and that they discovered the titles only shortly before suing. In 2014 they filed their complaint, praying for cancellation of the original certificate and all derivative titles, including Cavinti Realty's, insofar as these covered the unsold portion, and in the alternative for partition so that the unsold portion be segregated and reconveyed to them, plus damages.

Issues

• Whether or not the complaint sufficiently states a cause of action against Cavinti Realty.
• Whether or not Cavinti Realty is a real party in interest and an indispensable party in the action.
• Whether or not the complaint is barred by prescription.
• Whether or not Cavinti Realty's asserted status as an innocent purchaser for value defeats the action at the pleading stage.

Applicable Provisions

Article 1456 of the Civil Code provides:

If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.

This is the equitable foundation of the reconveyance action, and it is why the right to recover exists even against a holder who did not himself commit the fraud.

Section 32 of Presidential Decree No. 1529, which Cavinti Realty invoked on prescription, provides:

The registered owner or his assigns or heirs may file a petition in court to quiet title in cases of similar nature, and the court may order the annulment of the certificate of title or the reconveyance of the property to the rightful owner.

The provision frames the remedy of reconveyance that the plaintiffs seek, and the Court measures the timeliness of that remedy against the plaintiffs' continued possession.

Ruling

On the first issue, the Court held that the complaint states a cause of action. A cause of action requires a legal right in the plaintiff, a correlative duty on the defendant, and an act or omission violating that right. Under the hypothetical admission test, the court asks whether, assuming the allegations true, it can render a valid judgment in accordance with the relief demanded. The Court rejected the argument that the absence of an allegation of fraud against Cavinti Realty is fatal. In an action for reconveyance, it is not indispensable to allege that the present titleholder committed the fraud; it suffices that the plaintiff avers a legal claim of ownership and that the defendant holds title in derogation of that claim. The defendant's refusal to respect the superior right and to return the property is itself the actionable omission. Cavinti Realty's good faith is a matter of defense on the merits, not a ground to dismiss, and the Court may not receive evidence but must confine its inquiry to the four corners of the complaint.

The Court also drew the distinction between failure to state a cause of action, which concerns the sufficiency of the allegations and may be raised at the earliest stage, and lack of cause of action, which concerns the insufficiency of the factual basis and becomes evident only after the facts are established. The latter is raised by demurrer to evidence or as an affirmative defense, not by a pre-answer motion to dismiss.

On the second issue, the Court held that Cavinti Realty is both a real party in interest and an indispensable party. A real party in interest stands to be benefited or injured by the judgment; an indispensable party has such an interest that a final decree cannot be made without affecting it, and whose absence renders all subsequent actions of the court null and void. In reconveyance actions, the registered owners of the disputed property are indispensable, because it is their title that will be cancelled or confirmed. The original vendor or fraudfeasor is not strictly indispensable; the seller may be a necessary party for complete relief, but the dispute over ownership may be resolved between the original owner and the present titleholder.

On the third issue, the Court upheld the ruling that prescription does not bar the action at the pleading stage, in view of the plaintiffs' allegation of continued possession and the equitable character of the reconveyance action founded on implied trust.

On the fourth issue, the Court held that the claim of innocent purchaser for value does not defeat the complaint. Even an innocent transferee may be impleaded in an action for reconveyance, which is equitable and in personam, designed to compel the current holder to transfer the property to the party with the superior right. Good faith may affect the scope of the remedy or liability, but it does not defeat the court's jurisdiction to adjudicate claims of ownership.

Doctrine

First, a complaint for reconveyance states a cause of action when it alleges that the plaintiff has a legal claim of ownership and that the defendant currently holds title or possession in derogation of that claim; it need not allege that the present titleholder was the fraudfeasor, because the defendant's withholding of the property is the actionable omission. Second, failure to state a cause of action is tested solely on the face of the complaint under the hypothetical admission test, and affirmative defenses such as good faith and the protective mantle of the Torrens system are matters of evidence for trial. Third, failure to state a cause of action and lack of cause of action are distinct: the first attacks the allegations and may be raised at the outset, the second attacks the factual basis and is raised after the evidence is in. Fourth, in reconveyance and annulment of title cases, the registered owner of the disputed property is an indispensable party whose presence is mandatory, while the original vendor or fraudfeasor is not. All of these rules hang on Article 1456 of the Civil Code, which makes the acquirer through fraud or mistake an implied trustee for the true owner.

Disposition

The petition was denied and the decision and resolution of the Court of Appeals were affirmed; Nery and Maria prevailed, and the case was remanded for trial on the merits.

Remember This

Memorize this line: in reconveyance, the registered owner is the indispensable party, and the fraudfeasor need not be the one sued. Examiners use this case to test the hypothetical admission test, the distinction between failure to state a cause of action and lack of cause of action, and the rule that good faith is a defense on the merits, not a ground for a pre-answer dismissal.